Distortionary Taxation, Rule of Thumb Consumers and the Effect of Fiscal Reforms
AbstractWe consider a standard growth model augmented with a share of rule of thumb con- sumers. A Government ?nances a preset level of public expenditure through ?at tax rates on labor and capital income and also makes lump sum transfers to non ricardian consumers. It has been shown in representative agents models with perfect competition that balanced budget rules with endogenous tax rates are likely to generate indetermi- nacy of the perfect foresight equilibrium. We show that the presence of rule of thumb consumers reduces this possibility. Further, we show that a ?scal reform which features a reduction in the capital income tax rate and leads to the steady state where the welfare of non ricardian agents is maximized could be Pareto improving. This is obtained via a direct redistribution of resources to rule of thumb consumers along the transition path.
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Bibliographic InfoPaper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 113.
Length: 25 pages
Date of creation: 2007
Date of revision: 2007
Non Ricardian Agents; Fiscal Policy; Capital Income Tax Rate;
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
This paper has been announced in the following NEP Reports:
- NEP-ACC-2007-08-18 (Accounting & Auditing)
- NEP-ALL-2007-08-18 (All new papers)
- NEP-DGE-2007-08-18 (Dynamic General Equilibrium)
- NEP-MAC-2007-08-18 (Macroeconomics)
- NEP-PBE-2007-08-18 (Public Economics)
- NEP-PUB-2007-08-18 (Public Finance)
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